Cincinnati-based Kroger is about to close on a $2.5 billion purchase of upscale Harris Teeter, and is always on the lookout for the next great deal.

Could Dominick’smarkets in Chicago be Kroger’s next purchase? A&P on the East Coast? Or a solid regional performer like Weis Markets in Pennsylvania?

In the past year, Kroger executives have indicated a new willingness to grow faster – including through acquisition. And the timing could be right: More than $10 billion worth of deals have been announced this year in the supermarket industry – the biggest wave of consolidation since 2006.

Although more deals are likely for Kroger, the nation’s largest supermarket chain is notoriously picky about what it buys. Generally, Kroger prefers to acquire healthy operations, not struggling stores that currently dominate the prospective list of takeover rivals.

The steps Kroger takes with future acquisitions could determine how fast the company gets bigger and whether that means better. More stores and more sales could mean more profits and a higher stock price, unless Kroger acquires a dud that could drain resources and drag profits down.

Company executives don’t want a slowdown now. Shares hit an all-time high last week at $42.22, up more than 25 percent since the start of the year.

“I don’t see Kroger running out right away to make another major acquisition while still digesting and integrating Harris Teeter,” said Carol Levenson, an analyst with Gimme Credit. “But you never know.”

Acquisition can be easier way to enter new markets

Analysts say grocery-chain mergers are accelerating due to a combination of low interest rates on loans and a gradual economic recovery. Because the industry grows slowly and is very competitive, strong operators consider buying weaker ones as one of the fastest and cheapest ways to grow.

Kroger – one of the strongest financial operators – has virtual first-refusal rights on any store or chain up for sale, analysts say. The company’s all-cash offer beat out 18 rival suitors for Harris Teeter, the highly regarded chain of 212 stores known for its loyal customers and copious food samplings.

Executives with the North Carolina chain even rejected a slightly higher offer because they doubted the other bidder could deliver the stated value.

“Kroger has built itself up and is doing very well,” said Andy Wolf, an analyst with BB&T Capital Markets.

The Harris Teeter takeover comes a year after Kroger boldly announced it was stepping up its growth targets. Last October, the company said it would ramp up capital spending by $200 million each year. The company also said it would invest in a targeted expansion strategy “in existing markets and enter new markets.”

“Kroger typically expands in new territories through acquisitions,” Kantar Retail analyst Alida Destrempe wrote in a September report.

The Harris Teeter deal delivers on Kroger’s expansion goals by strengthening its presence in five Southeastern states and giving it a foothold in three new ones as well as the District of Columbia. Even after the deal closes late this year, Kroger still has more territory to fill: It has no presence in 16 states, mostly in the upper Midwest and the Northeast.

Analysts note that, besides Harris Teeter, Kroger hasn’t made a large acquisition since 1999, when it merged with the Fred Meyer chain in a $13 billion deal. Instead Kroger has scooped up handfuls of stores over the past decade in a series of smaller deals. Many see Kroger sticking to that playbook.

Kroger officials declined to comment for this story.

Struggling companies come with disadvantages

Potential deals abound in regions where Kroger might like to expand: Safeway announced last month it will exit the Chicago market where it operates the Dominick’schain. The New Jersey-based Great Atlantic & Pacific Tea Co. reportedly is shopping itself around. And Pennsylvania-based Weis Markets Inc. is in the midst of a management restructuring.

Analysts, though, believe Kroger will remain choosy. The turmoil within a company, division or market that often spurs the sale of a store or chain of stores could be what turns Kroger off.

“Kroger may not want a fixer-upper,” said Charles Pinson-Rose, an analyst with Standard & Poor’s. “They like good assets that add something to their operations.”

The Chicago market could be very appealing for Kroger, which strives to be the No. 1 or No. 2 player in every market in which it competes. Chicago is a major market where Kroger is a bit player with just 16 of its Food 4 Less stores.

“I wouldn’t rule it out. Kroger obviously wants to be in Chicago; it’s an opportunity to expand,” Morningstar analyst Ken Perkins said. “If anybody were to buy a lot of Dominick’s, it would be Kroger.”

Wolf noted, though, that Dominick’s is damaged goods: The No. 2 Chicago grocer (after Jewel-Osco) is in danger of slipping to No. 3 or 4. Kroger might be interested in buying some of the 72 stores for sale, but trying to turn around performance in a lot of them could prove an expensive distraction.

Perkins agreed that Kroger would need a big enough opportunity at a good price to justify buying a significant number ofDominick’s stores.

Ditto for Great Atlantic & Pacific Tea Co. with 320 stores from Maryland to Connecticut. The grocer has struggled and downsized for years and just emerged from bankruptcy in 2012. News reports say the whole A&P chain might be available for between $500 million to $1 billion.

“There’s a reason these assets are for sale,” Telsey Advisory Group analyst Joseph Feldman said.

Stock in Weis Markets trades at about $50 per share, cheap when measured by its price to earnings ratio. The company operates 165 stores in Pennsylvania, Maryland, New Jersey, New York and West Virginia.

While Weis Markets sales dropped 1.9 percent last year, its financial results are relatively strong, showing consistent profits for more than a decade. Nonetheless, its chief executive, David Hepfinger, abruptly left the company last month to “pursue other interests” and Jonathan Weis, 45, grandson of the founder, was named interim CEO.

Weis officials declined to say whether Weis will remain in charge or whether a permanent CEO is being sought.

Weis Markets keeps a fairly low profile in the industry, but analysts say family-controlled companies become more likely to sell out to a larger player when a third generation of family assumes control. Company chairman Robert Weis, the 93-year-old son of co-founder Harry Weis, owns almost 47 percent of the company.

Feldman said companies with families owning large stakes could make a deal very easy or shut it down, depending on their wishes. He declined to speculate what the Weis family might do with their company.

Another potentially undervalued chain operating in untapped or underpenetrated markets for Kroger would be Milwaukee-based Roundy’s, which operates 160 stores in Wisconsin, Minnesota and Illinois. Last year, Roundy’s booked a $69.3 million loss amid tougher competition after years of consistent profits. With a stock trading below $8 the entire company theoretically could be purchased for less than $350 million.

Back in Chicago, Wolf noted Kroger might be holding out for a far bigger prize: Jewel-Osco, the region’s No. 1 player with 176 stores. The chain was acquired by an investment group led by private equity outfit Cerberus Capital Management.

Jewel-Osco is part of the troubled Albertson’s empire that was sold off by Supervalu for $3.3 billion in March. Wolf believes Cerberus will fix up various Albertson’s divisions in the next few years, then sell them off. ⬛